• Tag Archives blockchain

  • The Osmosis Theory of Wealth Transfer: Gold to USD to Cryptos

    Posted on by Azrael Comment

    We are in the early stages of a new global financial epoch. The transfer of wealth from fiat into crypos is just beginning and will unfold over multiple decades. This article introduces a basic theory explaining how and why this wealth transfer is happening.

    Osmosis

    Do you remember from high school Chemistry the concept of osmosis?

    Here is the high school definition that I remember learning years ago: Osmosis is the movement of a solvent from an area of high concentration to an area of low concentration through a selectively permeable membrane.

    Here is the Wikipedia definition, with a nice diagram:

    Osmosis is the spontaneous net movement of solvent molecules through a semi-permeable membrane into a region of higher solute concentration, in the direction that tends to equalize the solute concentrations on the two sides.[1][2][3] It may also be used to describe a physical process in which any solvent moves across a semipermeable membrane (permeable to the solvent, but not the solute) separating two solutions of different concentrations.[4][5] Osmosis can be made to do work.[6]

    What has always fascinated me about this process is how it happens in a predictable and spontaneous manner. Also, if you study the Wikipedia diagram, you can see that the power of Osmosis is sufficient to actually counter the effects of gravity: the water on the one side of the beaker stands up higher than the water on the other side of the beaker.

    Just like a difference in the concentration of solute across two sides of a membrane causes the process of osmosis to happen spontaneously, and the solvent will defy the effects of gravity and flow upwards to a higher center of gravity, I believe that a difference in the relative security strength of two financial safe haven assets will cause money to flow in a similarly predictable and spontaneous way.

    Osmosis Theory of Wealth Transfer

    Just what causes money to flow? Fear and greed. Apart from day-to-day transactional usages, I would guess that 90%+ of money flows between savings accounts, Gold, ETFs, stocks, bonds, etc is driven by fear and greed. It is simple human psychology at work.

    As such, if some new safe haven asset for storage of wealth is introduced to the mix that is better than any prior safe-haven asset, then due to fear factors and greed factors investors will start to move some portion of their wealth into the new safe haven asset.

    As this process unfolds, the rising value of this new safe haven asset will lead more skeptical people in society to eventually jump on the bandwagon as fear of missing out takes hold. Thus fear and greed drive the popularity and allure of the new safe haven asset even higher.

    Thus, the pumping of financial wealth from the older safe-haven assets to the newly created and technically-superior ones will be as certain, predictable, and spontaneous as the process of osmosis “pumping of fluid” from one side of a selectively permeable membrane over to another.

    In formal terms, here is the “Osmosis Theory of Wealth Transfer”:

    If a differential exists in the security strength of two safe-haven assets, then this differential will lead to a certain, predictable, and spontaneous transfer of financial wealth, that is amplified by psychological factors of both human fear and greed.

    As this cycle proceeds, the new suitor for the crown of global safe haven asset gains in its credibility thus casting a spotlight on the potential weaknesses of the former safe haven asset that the masses are fleeing, thus quickening the pace and overall net effect of the wealth migration.

    Application

    This simple theory explains the meteoric rise we are seeing in the value of crypto digital assets today (e.g. BTC, XRP, etc). These digital assets are technologically-superior versus the old safe haven assets Gold and USD. USD was previously perceived as the safest asset, as it was backed by the strongest government, and at one point in time, the US government even had the bravado to disallow the usage of the prior competing safe-haven asset, Gold, as a medium of exchange. But, in the end, the USD is still backed by a government, and, indeed, all governments can fail. With the continuous lifting of the US debt ceiling, the rapid rise of inflation in the US economy over the past three decades, and the irrationality of the US Congress and White House Administration today, the end no longer seems implausible.

    In contrast, the crypto digital assets are supported by armies of decentralized computers across geopolitical boundaries, consensus protocols, and strong cryptography, and, this method is now successfully defending more than $150B of financial value. These new crypto assets are not at risk of government seizure or inflation, and they could survive even after the combined collapse of all of the political-economies in the West. Even with the entire world in utter chaos or World War III, there would not be any question of the safety and security of these assets.

    The Osmosis Theory of Wealth Transfer explains how the process of financial flows from the old safe haven asset to the new safe haven asset is a natural, inevitable, and spontaneous process driven by human psychology. We are still in the early stages of this cycle, but, the pace is quickening now.

    Reprinted from Medium


    Ryan Orr

    Dr. Orr is a Stanford University Professor, Consultant, Entrepreneur and Investor recognized around the world as an expert in infrastructure and technology.

    This article was originally published on FEE.org. Read the original article.



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  • ICOs Will Not Be Defeated

    Posted on by Azrael Comment

    Absolutely nothing–no amount of regulation, no number of belligerent articles, no plethora of hectoring denunciations by big shots–is going to stop ICOs from completely disrupting the way companies raise funding in the future.

    The crypto market has been too wonderfully successful without the slightest help from government or the financial establishment. We already know. We’ve seen. The idea is out there. It’s already worked. The deed is done.

    But now the counter-revolution is underway, with governments leaning in, establishment spokesmen trying to spook markets, and incumbent financial institutions decrying all disruption to their industry. It’s a coordinated attack.

    So it’s about time that people know precisely what an ICO is. It stands for Initial Coin Offering, a token used to express investment interest in ideas that are turned to enterprises. The number of ICOs this year far outstrips Initial Public Offerings of public companies (those seem to be on their way toward extinction) and beats the market capitalization of convention venture capital funding.

    A Goofy Explanation

    But before we get to the full explanation, consider this brilliant, evocative, and ridiculously misleading description from Kevin Roose from the New York Times.

    Imagine that a friend is building a casino and asks you to invest. In exchange, you get chips that can be used at the casino’s tables once it’s finished. Now imagine that the value of the chips isn’t fixed, and will instead fluctuate depending on the popularity of the casino, the number of other gamblers and the regulatory environment for casinos. Oh, and instead of a friend, imagine it’s a stranger on the internet who might be using a fake name, who might not actually know how to build a casino, and whom you probably can’t sue for fraud if he steals your money and uses it to buy a Porsche instead. That’s an I.C.O.

    From reading that paragraph, you could suspect that an ICO is a small-time scam that ropes in highly vulnerable population groups (think: the lottery). But if you received Goldman-Sachs’ newsletter from August this year, you would have discovered something slightly different. It turns out that in June of this year, ICOs raised $450 million, which surpasses the amount raised by early-stage venture capital funding. The same thing happened again in July. The total raised this year from ICOs is an astonishing $1.5 billion.

    ICOs are poised to not only exceed conventional funding sources, consistently over time, but even completely displace them. This is what innovations do. They replace what came before, whether pundits like it or not.

    Why It Works

    Why is this strategy for raising money for new ventures working so well? There is the most obvious consideration of low barriers to entry. Anyone can float them and anyone can buy them–from and to anyone in the world regardless of geography. There is a larger pool of investors that can bypass the impossibly costly and complex national regulatory machines that have gummed up capital-raising methods in conventional finance.

    That the market is mostly deregulated and decentralized, and thereby more active and effective, is itself interesting. No sector is more replete with the myths of “consumer protection” than this one. It seems hard to believe, but the whole basis of the SEC’s house of horrors is that it is all necessary to protect people from rapacious capitalists.

    For all I know, the regulators actually believe it.

    But the big players know otherwise. The purpose of the national machinery is to protect big shots against upstart competitors. From the point of view of establishment finance, only certain people should be allowed in, with others kept out, which is precisely why there are ever fewer companies that are in the privileged position of going to the public markets at all for funding.

    Nothing provides as much connection between entrepreneurs and funding as a real free market. But it has been a long time since the financial markets have been free. ICOs represent an attempt to fix the problem.

    New Technology

    And the solution is absolutely ingenious. It relies on decentralized markets that live on the Internet, combined with the invention of new tokens that have all the qualities of traditional money, depending entirely on supply and demand for their value, and also serve as asset titles to the protocol of the company itself. These tokens permit companies to crowdfund early operations in the same way that GoFundme, Kickstarter or Indiegogo do, but without the high cost of those platforms and the risk that your funds will be frozen by regulatory intervention.

    ICOs use blockchain technology, which is a ledger system of documenting ownership claims in the cloud, creating immutable records that are not kept by a centralized source but are rather shared among all interested parties. This creates the kind of trust that is necessary for commerce but does not require the kind of trust traditional financial intermediaries insist upon for doing any business at all.

    Changes in ownership rights are confirmed coming and going, and are made possible by digital units that are called tokens. But these tokens behave both like money and asset shares in the company, or, more precisely, as an expression of ownership interest,  analogous to a digital stock certificate that floats in value. Even so, they don’t entirely conform to the way any existing financial asset works today. They really do amount to something new because, well, all of this is a new invention.

    I get why people are a bit alarmed about it all, same as they were by internal combustion, electricity, flight, and, in its day, fire too. All wonderful new things seem implausible and vaguely dangerous at first. As new as the tech is, however, the need it meets–to more reliably establish and document ownership claims–dates to the earliest days of the human experience itself.

    Poker Chips

    I said that the poker chips analogy is ridiculous. Actually, it is not entirely. Let’s just say that you really could do that, pre-sell chips to your casino and establish a way in which the value of those chips floated against existing currencies. Let me just ask straight out: what would be wrong with that? It’s not allowed now, of course, so probably it sounds crazy. But actually, in a free market, this would be permitted.

    What about some dude that runs off with the money and never builds the casino? Well, you are welcome to try to get your money back if you can. But mostly, you should probably learn a lesson: don’t throw good money after bad.

    It’s the same with the crypto markets. Some tokens represent brilliant ideas, but many are pump-and-dumps, troll coins, or outright scams. There is a bit of a paradox here. Scammers are entrepreneurs too, and they are like heat-seeking missiles for the latest and greatest profitable ideas. That’s why they are hanging around the crypto space.

    And guess what? 100% of everyone involved in these markets knows this. Some people lose their shirts. Better luck next time. Others have become much richer, betting on brilliant platforms that are using blockchain technology to bring new standards of clarity, truth, and efficiency to all the ways we do business.

    Should government be involved in regulating them to protect the consumer? If there were the slightest chance that government could do this, it might be tempting to say yes. But no regulatory structures are more prone to capture by special interests than those governing financial markets. Every bit of intervention will be used on behalf of big shots to drive out regular consumers and smaller competitors.

    Laissez-Faire Now 

    For this reason, government should stay completely away (and I say that knowing that my proclamation will do nothing to stop government from meddling in any case).

    There are many projects underway right now that are bringing due diligence to this sector. If any market has proven itself capable of self-regulation, it is this one. It emerged spontaneously with the first release of the Bitcoin blockchain in 2009 and has developed gradually in exactly the way markets are supposed to. So too will the capacity of the sector to police itself will grow as knowledge and sophistication grow.

    It’s been an inspiration to watch this sector develop from the White Paper of November 2008 all the way to the latest peer-to-peer portfolio management systems using smart contracting. It’s all happened in nine years, after a time when credibility of conventional regulators, banks, and large financial institutions was shattered during paradigm-shifting crises.

    No one knows for sure where it is all headed but this much we do know: there is no going back.


    Jeffrey A. Tucker

    Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is also Chief Liberty Officer and founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.

    This article was originally published on FEE.org. Read the original article.


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  • Millennials Are Obsessed with Cryptoassets

    Posted on by Azrael 2 Comments

    Millennials Are Obsessed with Cryptoassets

    Now, this is revealing. The New York Times ran a piece on Bitcoin with this sentence: “from less than a cent in early 2010 to around $2,600 currently.” The problem is that when the story went live, the price was actually $3,400.” An editor didn’t think to check it, because he or she didn’t know to do so.

    This is how quickly these markets are moving. Not even the people assigned to be experts know enough to do a competent edit.

    And this is precisely why so many of us are constantly intrigued by these markets.

    Cryptofriends 

    Last week, when the NYT story was being filed, I was sitting at the national convention of the Young Americans for Liberty, feeling a vague sense of discomfort for one ridiculous reason. It had been a full day since I had talked with anyone about cryptoassets. So I grabbed the nearest dude and threw out a couple of observations. He lit up. He could talk ICOs, trading platforms, obscure coins and services, with the best of them. Soon others arrived. Then more. Pretty soon we had a big crowd, all talking and thinking about these bizarre new ways to invest.

    Pretty interesting. I could never have assembled such a posse of group discussion if I had been talking about bank stocks and the S&P 500. Too boring. The crypto market, on the other hand, is incredibly interesting, lucrative, changing and wildly dynamic. Yes, many people lose their shirts. This is not a disgrace but a bragging right. If you have bought high and watched the thing fall to zero, it only demonstrates your derring do. If you have made money, you are a bit cheeky about it because, after all, these markets are edgy.

    There is some glory in checking your smartphone in the middle of the night to find that your assets are up 10% since you went to bed. When you wake up and you are down 20% total, it’s sad but still exciting. That’s why people play these markets. And some people are truly winning.

    What does it mean to be a millionaire but all your assets are in brand new digital things with names like BCH, NEO, GBYTE, FCT, or DSH? And do you really want this information known? Probably not.

    It’s a Mania

    Another scene: I’m at the UPS store and paying with a Bitpay debit card. The guy behind the counter nonchalantly says that his choice coin is Monero. I banter with him a bit. We do what everyone in these discussions does: we test the limits of each other’s knowledge. Who among us is the more tech savvy and experienced. Discerning that gives insight into the real question: what is your crypto net worth?

    How likely is it that some dude I bump into at a mail service would know anything about this new thing going on? Could be a coincidence. Or he could be the voice of a generation. According to the New York Times, the second conclusion is the more likely truth.

    After years as a niche market for technologically sophisticated anarchists and libertarians excited about a decentralized financial network not under government control, digital coins may be on the verge of going mainstream…. Cryptocurrency has understandable appeal to millennials who came of age during the 2008 financial crisis and are now watching the rise of antiglobalist populism threaten the stability of the international economy.

    Typically with such reporting, there are great insights in this story, despite the misquoted price. The 2008 financial crisis traumatized a generation. They no longer trust banks. Conventional financial markets are driven by electronic trading, and there is no way to beat the market in the short run. Plus, there is the draw of the new and techy. Young people have no assets but they do have tech skill. Crypto markets are easy to get into and you are rewarded for knowing your way around. Older people tend to lack such skill, and they are afflicted by incredulity: surely this market is nothing more than a techno tulip mania.

    I can recall being in front of an audience of 3,000 people some three years ago, interviewing a major and famous global investor. In passing – slightly expecting to be ridiculed – I asked about Bitcoin. He blew up in fury, as if I had committed a faux pas. This is a fake, he said, just like all social media platforms and time-wasting video games. If young people think this is productive, they are sadly mistaken. This country needs to get back to making things rather than taking food selfies.

    I was crypto shamed.

    And that was that.

    Meanwhile, the dollar exchange ratio of Bitcoin moved from $30 to $3,000. Our savvy and “mature” and responsible investor was completely wrong. And he had misinformed thousands of people who had paid for his advice. And he was wrong because of the old Latin phrase: “Damnant quod non intellegunt.” They condemn what they do not understand.

    The young have no such hangups. They don’t need a theory to justify their interests. They discern that the market is pointing a certain direction even if they do not know why. You could chalk it up to naivete of youth. Or you could look at the old investor and observe that his failure to believe is due to the foolhardy incredulity of age.

    What It Is

    Let me attempt, yet again, to explain why these markets are not tulipmania. Tulips had always existed. Cryptoassets, on the other hand, are a new innovation. What is it? Some people understood early on. For people not stuck in the old ways, not biased by prevailing practices, this was promising and exciting.

    For the rest of us, it took time. It’s true that it is a way of hacking the internet to make a market-driven money. It’s true that the blockchain technology that backs cryptoassets makes for a great payment system, far faster, cheaper, and better than existing practices. Millennials know that the old way failed and, because of experience, they trust that there is a technological solution, even if old-world institutions are slow to adopt it.

    There’s more going on than just that. This technology is the newest and best iteration of a universal human demand to document ownership rights. After many years of struggling to understand this, this is my best-possible explanation. Humanity documented “mine and thine” since the ancient world: stones, clay, parchment, vellum, databases. There must be a record to compel social assent to anything.

    And it is not only about rights. It is about rules. But the failing of every previous piece of technology has been that it has been centralized: only one authoritative copy. Blockchain distributes that knowledge and authority to an infinite number of nodes.

    Is that an innovation? Yes. It’s everything. With millions of applications, only one of which could imply the possibility of abolishing government money and central banking in favor of a market-controlled money. And that’s just the most obvious. Blockchain actually offers up the hope that humanity can learn to master its own affairs on a purely voluntary basis: no need for coercive relationships, geographical jurisdictions, or preemptive revenue collection by force. It’s the realization of the old liberal dream.

    But not yet. It will take decades to get there. In the meantime, young people are having a blast. Good for them. They understand more about the world than those who are charged with copy editing the New York Times.


    Jeffrey A. Tucker

    Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is also Chief Liberty Officer and founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books. He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.

    This article was originally published on FEE.org. Read the original article.


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